5. IJBGM EFFECT OF NON PERFORMING ASSETS ON THE PROFITABILITY OF BANKS – A SELECTIVE STUDY

International Journal of Business
and General Management (UBGM)
ISSN(P): 2319-2267; ISSN(E): 2319-2275
Vol. 5, Issue 2, Feb - Mar 2016; 53-60
© IASET

EFFECT OF NON PERFORMING ASSETS ON THE PROFITABILITY OF BANKS - A

SELECTIVE STUDY

K. PRASANTH KIRAN 1 & T. MARY JONES 2

'Associate Professor, S. S. N. Engineering College, Ongole, Andhra Pradesh, India
Associate Professor, Pace Institute of Technology & Sciences, Ongole, Andhra Pradesh, India

IASET

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Engineering and Technology

Connecting Researchers; Nurturing Innovations

ABSTRACT

Nonperforming asset is the key term for the banking corporations. Non Performing Assets show the efficiency of
the performance of the banks. Non Performing Assets is the amount which is not received by the bank in return of loans
disbursed. The amount of Non Performing Assets affects not only the banking industry but the total financial system and
there by the economy of the country. Thus a selective study has been done on public sector banks in India to evaluate the
effect of Non Performing Assets on the profitability of banks. SBI and 5 nationalized banks were selected for the study and
the relation between their gross Non Performing Assets and net profit was measured. The result shows that except for SBI
all the other banks exhibit a negative correlation between their gross Non Performing Assets and net profits. But for SBI
the net profit is not at all affected by Gross Non Performing Assets and it is in continuous profits only.

KEYWORDS: Non Performing Assets, SBI, Net Profit, Correlation & Regression

INTRODUCTION

Indian Banking sector is considered one of the strongest among the other banking sectors. During 2008, Sub
Prime Crisis India was among the least affected countries because of the strict rules and regulations of Indian banking
sector. Indian banking industry is classified into Public sector banks. Private Sector banks. Regional rural banks and
Cooperative banks. In India there are 27 Public sector banks of which 17 banks are nationalized. Indian banking industry
announced deposits of Rs. 85331billions and loans and advances of Rs. 67352 billion for 2014 as against Rs. 74297
billions and Rs. 58798 billion in 2013. But the net profit is Rs. 912 billion in 2013 and Rs. 809 billion in 2014. The loans
and advances and deposits have been increased 14.5% and 14.3% respectively but net profit has been reduced by 11.3%.
This is mainly because of increase in gross nonperforming assets by 36.1%.

LITERATURE REVIEW

Definition:

• An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was
considered as non-performing asset (NPA) based on the concept of 'Past Due'. A ‘non performing asset’
(NPA) was defined as credit in respect of which interest and/or installment of principal has remained ‘past
due’ for a specific period of time.

■ Reserve Bank of India.

• DEFINITION of 'Non-Performing Asset - NPA ' A classification used by financial institutions that refer to

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54

K. Prasanth Kiran & T. Mary Jones

loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for
90 days the loan is considered to be a non-performing asset.

■ Non-Performing Asset (NPA) Definition I Investopedia
www.investopedia.com/terms/n/non-performing-assets.asp

• Defining NPAs: Non-performing Asset (NPA) means an asset for which:

■ interest or principal (or installment) is overdue for a period of 180 days or more from the date of
acquisition or the due date as per contract between the borrower and the originator, whichever is
later;

■ interest or principal (or installment) is overdue for a period of 180 days or more from the date fixed
for receipt thereof in the plan formulated for realization of the assets

■ interest or principal (or installment) is overdue on expiry of the planning period, where no plan is
formulated for realization of the assets.

■ any other receivable, if it is overdue for a period of 180 days or more in the books of the SC or ARC

-SARFAESI ACT

Classification: The Non performing assets are classified into three types.

• Sub Standard Assets: The assets which remain as non performing assets for not more than twelve months
are called Sub standard assets. The organization is supposed to maintain 15 % of its reserves for these assets.

• Doubtful Assets: The assets which have not been recovered for more than twelve months.

• Loss Assets: The assets which are declared as loss by the auditors but which are not written off.

Causes of NPA:

• Lending Practices of Banks: The banks should follow strictly follow rules and regulations while lending
loans. They should properly estimate the credit worthiness of the borrowers effectively. In 2008 the subprime
crisis has been occurred because of bad lending practices of banks.

• Business Risk: The organization may sometimes face problems with its own operational environment which
may result in losses for the company.

• Environmental Risk: Sometimes there may be environmental problems like cyclones, drought which does
not give the required output to the farmers and Agri based businesses.

• Psychology of the Borrower: Sometimes the attitude of the individual will not allow him to repay the money
even if he can.

• Incremental Credit policies of banks.

Problems caused by NPA:

• NPA Affects the Profitability of the Bank: The banks get their income from the loans and advances that are

Impact Factor (JCC): 3.9876

NAAS Rating: 2.97

Effect of Non Performing Assets on the Profitability of Banks - A Selective Study

55

disbursed and if these loans are not repaid then it is not possible for them to receive profits.

• It Will Affect the Liquidity and Goodwill of Banks: If the Profitability of the banks reduces then automatically
the bank will not be in a position to freely lend loans. Thus the organization liquidity will be affected and thereby
the Good will of the company will be affected.

• It Will Affect the Economy of the Country: The banking sector is the backbone for all the financial resources in
a country. If the banks’ profitability is affected then the total economy is affected.

According to Rajesh Parmer (2014) managing NPAs is a daunting task for every bank in the financial sector.
NPAs affect the position and performance of the banks in many dimensions. The NPAs are mainly because of willful
defaulters, 111 Processing of loans etc. As per Chatterjee, Mukherjee & Das (2012) NPAs have a negative effect on the
achievement of Capital Adequacy level. Funds mobilization. Banking system credibility and productivity on the overall
economy. As per their study the public sector banks are facing maximum problems in the banking sectors because of the
social responsibility they should bear. The private sector banks are upgraded with technology and are able to cope up with
changes and protect themselves.

According to Balasubramaniam & Gowde the banks are coping well with the situations and trying to be profitable
even in the critical conditions. The banks are managing their NPA levels and are able to reduce the NPAs with good credit
appraisal systems.

Sameer & Deepa (2013) expresses their opinion based on their study that the incidence of NPAs is affecting both
the banks and financial institutions psychologically and financially. The willful defaulters should be identified and treated
well to recollect the funds.

According to the study conducted by Dr. D. Ganesan and R. Santhanakrishnan the banks’ profitability can be
reduced only by effective management of NPAs. The NPAs of SBI has been continuously increasing for over a decade but
as the operations are more for SBI it is able to manage the profits. But still the remedial measures are to be specified to
control NPAs.

Santhanu Das have undergone a research work of managing NPAs in Indian public sector banks with special
reference to Jharkhand. Jharkhand is having the credit - deposit ratio half when compared to other parts of the country. The
borrowers blame the market failure for their inability to pay loans in time. Almost 32% of the bankers feel that lack of
entrepreneurship is the reason for NPAs 29 . 5 % feel that willful defaulters are the reason for NPAs in Jharkhand.

Prasanth Reddy identifies the following solutions for managing NPAs in the organizations.

• Don’t try to eliminate NPAs but manage them.

• Asset Reconstruction Companies should work effectively.

• Capital markets should be well developed.

• Securitization is very important

• Realignment of Performance indicators should be proper.

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K. Prasanth Kiran & T. Mary Jones

• Consistency and contextual decision making should be there.

Meenakshi & Mahesh explores the trend of NPAs in India. It shows the public sector banks which work with
welfare motive also records reduction of NPAs when compared to private sector banks.

Objectives of the Study:

The objectives of the present study are

• To examine the relationship between the non performing assets and the profitability of banks.

• To compare the performance of the Top bank in the industry with the least five banks in terms of
managing NPAs.

• To establish the correlation between NPAs and Net Profits of Banks.

Hypothesis of the Study:

Hi: There is no statistically significant relationship between changes in NPA and Net Profit of the bank.

H 0 : There is no statistically significant relationship between changes in NPA and Net Profit of the bank.

Research Methodology:

The present study is a descriptive study which tries to establish the relationship between the non performing assets
of a bank and its respective net profits.

The total public sector banks in India are 27. The sample is six public sector banks have been selected which is
22.22% of the total population. The criteria is the top performer in the industry i.e., SBI and the five other banks with high
nonperforming assets as per the announcement of Finance ministry in the recent past. The final analysis is done be
Correlation and Regression using MS Excel.

RESULTS AND DISCUSSIONS

Net Profit:

Table 1

Sbi

United
Bank of
India

Dhana
Laxmi Bank

Central
Bank of
India

Punjab &
Sind Bank

Punjab

National

Bank

Indian Overseas
Bank

2005

4,304.52

300.18

-21.6

301.5

6.92

1,410.12

651.36

2006

4,406.67

-73.87

9.52

257.42

284.58

1,439.31

783.34

2007

4,541.31

267.28

16.14

498.01

390.27

1,540.08

1,008.43

2008

6,729.12

318.95

32.48

550.16

389.57

2,048.76

1,202.34

2009

9,121.23

184.71

57.45

571.24

434.41

3,090.88

1,325.79

2010

9,166.05

322.36

23.3

1,058.23

508.8

3,905.36

706.96

2011

7,370.35

523.97

26.06

1,252.41

526.17

4,433.50

1,072.54

2012

11,707.29

632.53

-115.63

533.04

451.29

4,884.20

1,050.13

2013

14,104.98

391.9

2.62

1,014.96

339.22

4,747.67

567.23

2014

10,891.17

0

-251.91

-1,262.84

300.6

3343

601.74

Impact Factor (JCC): 3.9876

NAAS Rating: 2.97

Effect of Non Performing Assets on the Profitability of Banks - A Selective Study

57

oooooooooo

(N(N(N(N(N(N(N(N(N(NI

SBI

UNITED BANK OF

INDIA

DHANALAXMI BANK

CENTRAL BANK OF

INDIA

PUNJAB & SIND BANK

PUNJAB NATIONAL

BANK

This is the trend of Net Profit for the different banks for the years 2005 - 2014. Almost all the banks have
experienced a negative growth in the year 2014 when compared to the net profit of 2013.

Gross NPA:

Table 2

Year

SBI

United
Bank of
India

Dhanalaxmi

Bank

Central
Bank of
India

Punjab &
Sind Bank

Punjab

National

Bank

Indian

Overseas

Bank

2005

12456.3

726.4

125.6

2621.4

0

3741.3

1388.2

2006

10375.8

744.3

111.4

2684.2

941.5

3138.3

1227.6

2007

9998

817

96

2572

291

3391

1120

2008

12,837.34

761

63

2350

136

3319

997

2009

15,588.60

1019.6

64.4

2316.5

161

2767.5

1923.4

2010

19,534.89

1,355.78

77.5

2457.9

206.2

3214.4

3441.7

2011

25,326.29

2,176.42

67.09

2,394.53

424.28

8,719.62

3,920.07

2012

39,676.46

2,963.82

104.27

7,273.46

763.44

13,465.79

6,607.96

2013

51,189.39

7,118.01

380.27

8,456.18

1,536.90

18,880.06

9,020.48

2014

61,605.35

6,552.91

485.82

11,500.01

2,553.52

25,694.86

14,922.45

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K. Prasanth Kiran & T. Mary Jones

SBI

UNITED BANK OF

INDIA

DHANALAXMI BANK

CENTRAL BANK OF

INDIA

PUNJAB & SIND BANK

PUNJAB NATIONAL

BANK

The Gross NPAs have been continuously increasing for all the banks for the specified period. As the business
operations of banks have been increasing the amount of NPAs have also increased.

Correlation between Gross NPA and Net Profit of the selected banks:

Table 3

Bank

Correlation

SBI

0.831428753

United Bank Of India

0.022008474

Dhanalaxmi Bank

-0.714992969

Central Bank Of India

-0.591325706

Punjab & Sind Bank

-0.07562175

Punjab National Bank

0.555161197

Indian Overseas Bank

-0.506536905

Correlation

i

Impact Factor (JCC): 3.9876

NAAS Rating: 2.97

Effect of Non Performing Assets on the Profitability of Banks - A Selective Study

59

Table 4

Bank

Correlation

Regression

Coefficients

Standard Error

SBI

0.831428753

Intercept

4332.533816

1115.09143

X Variable 1

0.150885921

0.03565049

Dhanalaxmi

-0.714992969

Intercept

48.44397626

32.7758379

Bank

X Variable 1

-0.448160575

0.15493368

Central Bank Of

-0.591325706

Intercept

1025.570966

324.402859

India

X Variable 1

-0.122833271

0.05922601

Punjab National

0.555161197

Intercept

2260.202956

584.949038

Bank

X Variable 1

0.095455528

0.05056221

Indian Overseas

-0.506536905

Intercept

1030.466819

111.734722

Bank

X Variable 1

-0.029949346

0.01802389

The banks have expressed a surprising correlation between Gross NPA and the Net profit. SBI and Punjab
National Bank have shown positive correlation. United Bank of India does not represent any correlation while all the others
expressed negative correlation.

Normally the profitability of the banking sector depends on recovery of loans on time which are disbursed to the
different sectors. The performance of banking sector depends on how effectively you manage the non performing assets.
Here the banks like Central Bank of India, Dhanalakshmi Bank etc are experiencing severe losses which results in the
negative growth rate of the company. Except SBI and Punjab National Bank all the banks are facing problems with respect
to NPAs. It does not indicate that the more NPAs the more profits for SBI but the largest bank of India is able to receive
more profits only because of its wide variety of financial services and effective management of NPAs. But if NPAs
continue in the same manner then even large banks will also stumble like Lehman Brothers in USA which resulted in
International economic crisis.

Findings of the Study:

• All the banks are having non performing assets in their balance sheets.

• The NPAs are going on increasing for all the banks.

• The large banks are able to maintain the losses by NPAs but small banks are not able to recover.

• SBI is also having huge losses but it is also earning high profits.

• Public sector banks are facing more issues by NPAs.

CONCLUSIONS

The economic growth of every country depends on the proper functioning of financial system of the country. The
financial system mainly comprises banking sector. Now a days our government is concentrating in developing our
economy which needs huge financial resources. Thus the GDP of India will only grow if the required funds will be
invested in the economy which gives rise to faster growth in the economy. Thus banking sector should now mainly focus
on effective management of NPAs to increase their profitability and thereby provide as much funds as possible to the
industry. The organisations should develop new strategies to improve the recovery of loans.

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K. Prasanth Kiran & T. Mary Jones

REFERENCES

1. Dr. D. Ganesan R.Santhanakrishnan, Non-Performing Assets: A Study Of State Bank Of India, Asia Pacific
Journal of Research, October 2013, Volume: I, Issue: X

2. Samir & Deepa Kamra , A Comparative Analysis of Non- Performing Assets

3. (NPAs) of Selected Commercial Banks in India, International Journal of Management, Vol. 3, No. 1, June 2013

4. Rajeshwari Parmar , Non Performing Assets (NPAs): A Comparative Analysis of SBI and ICICI Bank,
International Journal for Research in Management and Pharmacy, Vol. 3, Issue 3, April 2014 (IJRMP) ISSN:
2320- 0901

5. Prashanth K Reddy , A Comparative study of non performing assets in India in the global context - similarities
and dissimilarities, remedial measures. Indian Institute of Management.

6. Sreedharan, M. (1996) “The Indian Banking Industry’s Dilemma”, Express Investment Week, 6.51, (December
16-22, 1996), pp. 10-13.

7. Rangarajan, C. Governor, RBI, Speech at the Bankers" Training Centre of the Nepal Rashtra Bank Katmandu on
18th May 1997.

8. Kohli , “Directed Credit and Financial Reforms”, Economic and political weekly, 32-42 (October 18-24, 1997),
pp. 2667-2676.

Impact Factor (JCC): 3.9876

NAAS Rating: 2.97